Disability, Pension Reform, and Early Retirement in Germany

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Being born during wartime and times of hunger may have had long-term effects on health and ability to work.

Even as the average life span has crept up in West Germany, the labor force participation of the elderly there has historically declined, according to Disability, Pension Reform and Early Retirement in Germany (NBER Working Paper No. 17079) by Axel Boersch-Supan and Hendrik Juerges. In 1966, labor force participation among 60- to 64-year-old men stood at more than 80 percent. By the 1980s and 1990s, it had fallen to less than 35 percent, and has only started to increase very recently.

The bulk of that change in retirement occurred between 1973 and 1979, when pension reforms dropped the effective retirement age from 65 to 63 and introduced an old age pension for disabled workers, lowering the eligibility age for that program (eventually) to 60. Germany's public pension system became more generous with a 1972 reform, but was trimmed back in the mid-1980s and starting again in 1992 because changing demographics made it unsustainable. Rising life expectancy was the main reason for the cutback: in 2006, a 73-year-old man or woman had the same probability of dying within the next year as a 65-year-old had had in 1960.

In terms of disability insurance - which all developed nations have - governments including Germany's face a difficult balancing act. They want to insure that people who can't work because of their health don't fall into poverty, while at the same time not creating undue incentives for the healthy to retire early. European nations have struck widely different balances in this regard. In Sweden, Denmark, and Norway, the percentage of 50- to 64-year-olds retiring early and collecting disability benefits stands above 12 percent, while in France it is less than 2 percent. Germany falls somewhere in-between at 6.5 percent. The authors of this study investigate whether changes in disability programs in Germany - and in social security programs, more generally - have had an impact on participation in disability insurance and exit from the labor force.

Mortality is not necessarily a good proxy for disability, which might begin with the onset of a long disease. The authors find that with the exception of cancer, serious physical challenges such as cardiovascular disease or back problems have become much less prevalent as the reason for receiving a disability pension over time. Instead, the relative importance of mental illness as the basis for disability benefits has quadrupled for men and quintupled for women since 1983. By the same token, workers aged 50 to 59 have seen their health improve.

For groups born between 1906 and 1943, early retirement (before age 55) shows no clear trend among the men, hovering around 12 to 16 percent, and there has been a decline among women (from 14 to about 8 percent). In contrast, among both men and women born between 1914 and 1918 there was a noticeable rise in early retirement rates, going from 12.7 to 17.2 percent among men and from 9.8 to 12.7 percent among women.

Why this spike? It could be the health shock of World War I and its aftermath, which caused the long-term health of those groups to deteriorate. "In particular the last two years of war (1917 and 1918) have been characterized by widespread hunger among the civilian population," the authors write. "Being born during wartime and times of hunger may have had long-term effects on health and ability to work, and the effects of World War I appear to show in the retirement behavior of German cohorts."

--Laurent Belsie